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Is Ethical Money Sensitive to Past Returns? The Case of Portfolio Constraints and Persistence in Islamic Funds

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Abstract

In this paper, we analyze the performance persistence and survivorship bias of Islamic funds. The remarkable growth of these types of ethical funds raises the question of how non-financial attributes, including beliefs and value systems, influence performance and its persistence. A procedure commonly used in prior literature to assess persistence is the measuring of the performance of investment strategies based on past performance. In this context, we propose a refined version of this methodology that controls the cross-sectional significance of the performance of these strategies. This procedure correctly identifies whether abnormal performance is due to a dynamic investment strategy based on past performance, or whether it is obtained by investing in a particular set of mutual funds. The significance of the persistence varies depending on the time horizon (yearly/half-yearly), survivorship, or the tail of the distribution. In particular, we find that persistence only exists for the best funds, whereas for the worst funds, the results are not significant.

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Notes

  1. Shari’ah-compliant assets avoid Shari’ah prohibited companies such as those dealing with alcohol, tobacco, arms, biotechnology for human cloning, and companies with heavy debt financing to avoid dealing with interest.

  2. It is considered discriminatory and unfair, by Islamic standards, to charge a fixed rate of interest on an investment loan. This is because the entrepreneur, or borrower, accepts the full risk, while the lender receives the set amount, whether or not the venture is successful. In contrast, the lender, when the profit is very high, will gain a relatively smaller portion of the profit. The borrower gains the greater portion, which implies that there has been an uneven sharing of both profit and risk (Novethic 2009).

  3. Unless the firm exceeds the financial ratio (such as gearing) thresholds.

  4. See http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

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Author information

Authors and Affiliations

  1. University of Hull, Hull, UK

    Meryem Duygun

  2. Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK

    Omneya Abdelsalam

  3. Dpto. Finanzas y Contabilidad, Universitat Jaume I, Av. Vicent Sos Baynat s/n, Castellón, Spain

    Juan Carlos Matallín-Sáez

  4. Dpto. Economía, Universitat Jaume I and IVIE, Av. Vicent Sos Baynat s/n, Castellón, Spain

    Emili Tortosa-Ausina

Authors
  1. Omneya Abdelsalam
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  2. Meryem Duygun
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  3. Juan Carlos Matallín-Sáez
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  4. Emili Tortosa-Ausina
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Corresponding author

Correspondence to Meryem Duygun.

Additional information

We thank an anonymous referee, the co-editor, Sanjiv Das, and the editor, Haluk Ünal, whose comments helped greatly in the overall improvement of the article, as well as those by Mohamed Shaban on a preliminary version. Juan Carlos Matallín and Emili Tortosa-Ausina acknowledge the financial support provided by Ministerio de Economía y Competitividad (ECO2014-55221-P), Universitat Jaume I (P1·1B2012-07 and P1·1B2014-17) and Generalitat Valenciana (PROMETEOII/2014/046). All authors are grateful to El Shaarani Centre for Islamic Business and Finance at Aston Business School for financially supporting this project.

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Abdelsalam, O., Duygun, M., Matallín-Sáez, J.C. et al. Is Ethical Money Sensitive to Past Returns? The Case of Portfolio Constraints and Persistence in Islamic Funds. J Financ Serv Res 51, 363–384 (2017). https://doi.org/10.1007/s10693-015-0234-x

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  • DOI: https://doi.org/10.1007/s10693-015-0234-x

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